Popular investment manager Cathie Wood has been keen on DraftKings (DKNG -1.48%) and Roku (ROKU -0.67%) for a while now. The two are among the top holdings in at least one of her Ark Invest exchange-traded funds.
Unfortunately for Wood and their other shareholders, the two stocks both dove after the companies reported fourth-quarter earnings results last week. Let's look at what's driving these sell-offs, and attempt to determine whether they have created a smart buying opportunity for long-term investors.
Roku reported fourth-quarter and full-year results after the markets closed on Feb. 17. The figures highlighted a company plagued by worldwide supply-chain shortages, and the stock crashed by more than 20% following the earnings release. Overall, revenue increased by 55% in the quarter. Despite that top-line growth, though, income from operations decreased by more than two-thirds to $21.4 million from $65.2 million in the prior-year period.
The bulk of that decline emanated from its player segment, where gross losses are accelerating. The player segment reported a gross loss of $45.9 million in Q4, worse than its loss of $14.6 million in Q3. Supply-chain issues left the company paying more for its device components and transportation, but management felt it could not pass along those higher costs to consumers without experiencing a meaningful, adverse reaction. To make matters worse, management said it expects these issues to persist in the near term, and offered no specifics about when it thought the headwinds might abate.
That said, if you zoom out a bit, Roku's long-term prospects appear bright. More and more people are switching to streaming content rather than watching linear TV via cable or satellite connections. As the No. 1 streaming platform in the U.S., Canada, and Mexico, Roku will benefit from that trend for several years.
DraftKings reported its Q4 and 2021 results on Feb. 18, and the market's reaction to them was similar to its reaction to Roku's. However, the reasons were not the same. DraftKings is a digitally native business that offers daily fantasy sports, mobile sports betting, and iGaming. As such, it is not impacted by supply-chain shortages.
Instead, DraftKings' share price is falling due to the broader market's pivot away from unprofitable growth stocks. The company's revenue growth accelerated to 111% in 2021, but losses are mounting on the bottom line. Its mobile sports betting services are available in 17 states, and its iGaming platform is accessible in five. Legalization of these activities at the state level has only in the past several years been gaining steam, and the company is investing heavily to capitalize on the trend. In 2021, it reported a net loss of $1.5 billion on revenue of $1.3 billion.
To make matters worse, management expects the bottom-line losses will continue over the next few years as the company expands into new states.
As with Roku, investors need to look at the bigger, longer-term picture when it comes to DraftKings. Mobile gaming is in many ways a superior product to what is offered by brick-and-mortar casinos. People no longer need to travel to their nearest casino (which may be hours away from their home) to place a wager. And it's far less expensive to operate an online gaming business than a physical casino.
As good a time as any to buy Roku and DraftKings
At one point in the past year, Roku was selling at a price-to-sales ratio of over 32 -- now, it's about 6. Similarly, DraftKings in 2021 traded at a multiple of nearly 24, and it's now also at around 6.
Short-term factors have both of these excellent companies selling at significantly lower prices, and it's as good a time as any for long-term investors to acquire shares.